We enter into contracts so many times in a day that ‘contract’ has

become an indispensable part of our life. When you purchase milk or

newspaper in the morning or go to movie in the evening, you are
entering into a contract. Indian Contract Act really codifies the way we
enter into a contract, execute a contract, implement provisions of a
contract and effects of breach of a contract. Basically, a person is free
to contract on any terms he chooses. The Contract Act consists of
limiting factors subject to which contract may be entered into,
executed and breach enforced. It only provides a framework of rules
and regulations which govern formation and performance of contract.
The rights and duties of parties and terms of agreement are decided by
the contracting parties themselves. The court of law acts to enforce
agreement, in case of non-performance.
Section 1 of Contract Act provides that any usage or custom or trade or
any incident of contract is not affected as long as it is not inconsistent
with provisions of the Act. In other words, provision of Contract Act will
prevail over any usage or custom or trade. However, any usage,
custom or trade will be valid as long as it is not inconsistent with
provisions of Contract Act. The Act extends to the whole of India except
the State of Jammu and Kashmir; and came into effect on 1-9-1872.
It must be noted that contract need not be in writing, unless there is specific
provision in law that the contract should be in writing. [e.g. * contract for sale of
immovable property must be in writing, stamped and registered. * Contracts
which need registration should be in writing * Bill of Exchange or Promissory Note
must be in writing. * Trust should be created in writing * Promise to pay a time
barred loan should be in writing, as per Limitation Act * Contract made without
consideration on account of natural love and affection should be in writing ]. A
verbal contract is equally enforceable, if it can be proved.. A contract can be
enforced or compensation/damages for breach of contract can be obtained
through Civil Court
Essential Ingredients of a contract - As per Contract Act, an
agreement enforceable by law is a contract. [section 2(h)]. Hence, we have to understand
first what is ‘agreement’.
Every promise and every set of promises, forming the consideration for each other, is an
agreement. [section 2(e)]. - - A person makes a proposal (offer). When it is accepted by
other, it becomes a promise. However, promise cannot be one sided. Only a mutual
promise forming consideration for each other is ‘agreement’. - - For example, A agrees to
pay Rs 100 to B and B agrees to give him a book which is priced at Rs 100. This is set of
promises which form consideration for each other. However, if A agrees to pay Rs 100 to
B, but B does not promise anything, it is not ‘set of promises forming consideration for
each other’ and hence not an agreement.
It should be noted that the term ‘agreement’ as defined in Contract Act requires mutual
consideration. - - Thus, if A invites B to dinner and B agrees to come, it is not an
‘agreement’ as defined in Contract Act.
MEANING OF ‘PROPOSAL’ - When one person signifies to another his willingness to
do or to abstain from doing anything, with a view to obtaining the assent of that other to
such act or abstinence, he is said to make a proposal. [section 2(a)].- - Thus, a ‘proposal’
can be to do a positive act or abstinence from act (i.e. negative act). [English Act uses the
word ‘offer’, while Indian Contract Act uses the word ‘proposal’. Generally, both words
are used inter-changeably. This is not technically correct, as the word ‘offer’ is not used in
Contract Act].
MEANING OF ‘PROMISE’ - When the person to whom the proposal is made signifies
his assent thereto, the proposal is said to be accepted. A proposal, when accepted,
becomes a promise. [section 2(b)]. - - Thus, when a proposal (offer) is accepted, it
becomes a ‘promise’. As is clear from the definition, only person to whom proposal is
made can signify his assent. Other person cannot accept a proposal.
PROMISOR AND PROMISEE - The person making the proposal is called the
“promisor”, and the person accepting the proposal is called the “promisee”. [section 2(c)].
RECIPROCAL PROMISES - Promises which form the consideration or part of the
consideration for each other are called reciprocal promises. [section 2(f)].
Consideration for promise – The definition of ‘agreement’ itself states that the mutual
promises should form consideration of each other. Thus, ‘consideration’ is essential for an
agreement. A promise without consideration is not ‘agreement’ and hence naturally, it is
not a ‘contract’.
DEFINITION OF ‘CONSIDERATION’ - When, at the desire of the promisor, the
promisee or any other person has done or abstained from doing, or does or abstains from
doing, or promises to do or to abstain from doing, something, such act or abstinence or
promise is called a consideration for the promise. [section 2(d)].
Steps involved in contract - The steps involved in the contract are – * proposal and its
communication * acceptance of proposal and its communication * Agreement by mutual
promises * Contract * Performance of Contract. - - All agreements are not contract. Only
those agreements which are enforceable by law are ‘contracts’. Following are essential
requirements of a valid contract.

Offer and its acceptance

Free consent of both parties

Mutual and lawful consideration for agreement

It should be enforceable by law. Hence, intention should be to create legal

relationship. Agreements of social or domestic nature are not contracts
Parties should be competent to contract

Object should be lawful

Certainty and possibility of performance

Contract should not have been declared as void under Contract Act or any
other law
Communication, acceptance and revocation of proposals -
Communication of proposal/ revocation/acceptance are vital to decide
validity of a contract. A ‘communication’ is complete only when other
party receives it.
ACCEPTANCE MUST BE ABSOLUTE - In order to convert a proposal into a promise,
the acceptance must - (1) be absolute and unqualified; (2) be expressed in some usual and
reasonable manner, unless the proposal prescribed the manner in which it is to be
accepted. If the proposal prescribes a manner in which it is to be accepted, and the
acceptance is not made in such a manner, the proposer may, within a reasonable time after
the acceptance is communicated to him, insist that his proposal shall be accepted in the
prescribed manner, and not otherwise; but if he fails to do so, he accepts the acceptance.
[section 7].
Acceptance of offer is complete only when it is absolute and unconditional. Conditional
acceptance or qualified acceptance is no acceptance.
PROMISES, EXPRESS OR IMPLIED - Insofar as the proposal or acceptance of any
promise is made in words, the promise is said to be express. Insofar as such proposal or
acceptance is made otherwise than in words, the promise is said to be implied. [section 9].
- - For example, if a person enters a bus, there is implied promise that he will pay the bus
fair.
VOIDABLE CONTRACT - An agreement which is enforceable by law at the option of
one or more of the parties thereto, but not at the option of the other or others, is a voidable
contract. [section 2(i)]. - - (a) When consent is obtained by coercion, undue influence,
misrepresentation or fraud is voidable at the option of aggrieved party i.e. party whose
consent was obtained by coercion/fraud etc. However, other party cannot avoid the
contract. (b) When a contract contains reciprocal promises and one party to contract
prevents the other from performing his promise, the contract becomes voidable at the
option of the party to prevented. (section 53). Obvious principle is that a person cannot
take advantage of his own wrong (c) When time is essence of contract and party fails to
perform in time, it is voidable at the option of other party (section 55). A person who
himself delayed the contract cannot avoid the contract on account of (his own) delay.
VOID CONTRACT - A contract which ceases to be enforceable by law becomes void
when it ceases to be enforceable. [section 2(j)]. - - Thus, initially a contract cannot be
void, i.e. a contract cannot be void ab initio. The simple reason is that in such a case, it is
not a contract at all to begin with. Hence, only a valid contract can become void contract
due to some subsequent events. e.g. the person dies or property is destroyed or
Government imposes a ban etc. - - A void agreement is void ab initio. It never becomes a
contract. It is nullity and cannot create any legal rights.
What agreements are contracts - All agreements are contracts if
they are made by the free consent of parties competent to contract, for
a lawful consideration and with a lawful object, and are not hereby
expressly declared to be void. Nothing herein contained shall effect any
law in force in India and not hereby expressly repealed, by which any
contract is required to be made in writing or in the presence of
witnesses, or any law relating to the registration of documents. [section
10].
Who are competent to contract - Every person is competent to
contract who is of the age of majority according to the law to which he
is subject, and who is of sound mind, and is not disqualified from
contracting by any law to which he is subject. [section 11].
Free consent – Consent of both parties must be free. Consent obtained through coercion,
undue influence, fraud, misrepresentation or mistake is not a ‘free consent’. - - Two or
more persons are said to consent when they agree upon the same
thing in the same sense. [section 13]. - - Consent is said to be free when it is
not caused by - (1) coercion, as defined in section 15, or (2) undue influence, as defined
in section 16, or (3) fraud, as defined in section 17, or (4) misrepresentation, as defined in
section 18, or (5) mistake, subject to the provisions of sections 20, 21 and 22. - -
Consent is said to be so caused when it would not have been given but
for the existence of such coercion, undue influence, fraud,
misrepresentation or mistake. [section 14].
Void agreements - An agreement not enforceable by law is said to be void.
[section 2(g)]. - - Note that it is not ‘void contract’, as an agreement which is not
enforceable by law does not become ‘contract’ at all. Following are void
agreements - * Both parties under mistake of fact (section 20) * Unlawful object
or consideration (section 24) * Agreement without consideration (section 25) *
Agreement in restraint of marriage (section 26) * Agreement in restraint of trade
(section 27) * Agreement in restraint of legal proceedings (section 28) * Uncertain
agreement (section 29) * Wagering agreement (section 29) * Agreement to do an
impossible Act (section 56). - - These are discussed below.
Obligation of person who has received advantage under void agreement or contract
that becomes void - When an agreement is discovered to be void, or when a contract
becomes void, any person who has received any advantage under such agreement or
contract is bound to restore it, or to make compensation for it, to the person from whom
he received it.
Contingent contract - A “contingent contract” is a contract to do or not to do
something, if some event, collateral to such contract, does or does not happen.
Illustration - A contracts to pay B Rs. 10,000 if B’s house is burnt. This is a
contingent contract. [section 31].
Contracts which must be performed - The parties to a contract must either perform, or
offer to perform, their respective promises, unless such performance is dispensed with or
excused under the provisions of this Act, or of any other law. Promises bind the
representatives of the promisors in case of the death of such promisors before
performance, unless a contrary intention appears from the contract. - - Illustrations - (a) A
promises to deliver goods to B on a certain day on payment of Rs. 1,000. A dies before
that day. A’s representatives are bound to deliver the goods to B, and B is bound to pay
Rs. 1,000 to A’s representatives. (b) A promises to paint a picture for B by a certain day, at
a certain price. A dies before the day. The contract cannot be enforced either by A’s
representative or by B [section 37]. The performance can be ‘actual performance’ or
‘attempted performance’, i.e. ‘offer to perform’.
Performance of reciprocal promises - Promises which form the consideration
or part of the consideration for each other are called reciprocal promises. [section
2(f)]. A mutual promise can be of following types – (a) Mutual and independent –
Where each party must perform his promise independently and irrespective of
whether the other party has performed or willing to perform e.g. Seller agrees to
deliver on 5th and Buyer agrees to pay on 15th. (b) Conditional and dependent –
Performance of promise by one party depends on prior performance of promise
by other party. e.g. Buyer agrees to pay for goods 15 days after delivery. Hence,
unless seller delivers goods, buyer’s liability does not arise. (c) Mutual and
concurrent – Where the promises of both parties must be performed
simultaneously. e.g. buyer agrees to pay immediately on delivery of goods i.e.
cash payment.
Contracts which need not be performed - Normally, a contract is expected to be
performed. The performance my be actual or by way of tender, i.e. attempted
performance. However, in certain situations as stated below, the contract need not be
performed. * Novation, rescission and alteration of contract * Promisee may dispense
with or remit performance of promise * Effect of neglect of promisee to afford
promisor reasonable facilities for performance * Merger of superior rights
with inferior right under contract. This is usually termed as ‘discharge of contract’.
Quasi Contracts - ‘Quasi’ means ‘almost’ or ‘apparently but not really’ or ‘as if it
were’. This term is used when one subject resembles another in certain
characteristics but there are intrinsic differences between the two. ‘Quasi
contract’ is not a ‘contract’. It is an obligation which law created in absence of any
agreement. It is based on equity. There are certain relations resembling those
created by contract. These are termed as ‘quasi contracts’. These are – (a)
Supply of necessaries (section 68) (b) Payment of lawful dues by interested
person (section 69) (c) Person enjoying benefit of a gratuitous act (section 70) (d)
Finder of goods (section 71) (d) Goods or anything delivered by mistake or
coercion (section 72).
Consequences of Breach of Contract - Compensation is payable for breach of
contract. Penalty is also payable if provided in contract. Breach of contract may
be actual or anticipatory.
Summary of principles of compensation and damages - Following points are
important - * Compensation for loss or damage is payable. Since the word used
is ‘compensation’, punitive damages cannot be awarded. * These should be in
usual course or known to parties i.e. both parties must be aware * No
compensation for remote and indirect loss or damage * Same principle applies to
quasi contract also.
GENERAL DAMAGES – General damages are those which result from ‘direct
and proximate’ consequences from breach of contract. Normally, what can be
awarded is compensation for loss or damage which can be directly or proximately
attributed to the breach of contract. One way of assessing damages is the
difference between the contract price and the market price on date of breach of
contract, plus reasonable expenses incurred by him on account of the breach
plus cost of suit in court of law.
CONSEQUENTIAL LOSS OR SPECIAL DAMAGE – Special damages or
consequential damages arise due to existence of special circumstances. Such
damages can be awarded only in cases where the special circumstances were
foreseeable by the party committing the breach or were specifically known to the
party. Consequential losses like loss of profit due to breach, which may occur
indirectly due to breach cannot be normally awarded unless there are special
circumstances which parties were aware. Loss of profit can be awarded only in
cases where seller could have foreseen those losses and arose directly as result
of breach.
PROMISEE SHOULD TAKE STEPS TO MITIGATE THE LOSS OR DAMAGE –
Explanation to section 73 specifically provides that in estimating loss or damage,
the means available for remedying the inconvenience caused by breach of
contract shall be taken into account. Thus, promisee should take all reasonable
steps to mitigate the losses e.g. if promisor does not supply goods, he should
make efforts to procure from alternate sources may be even at higher price, to
reduce his losses arising out of breach of contract.
VINDICTIVE OR EXEMPLARY DAMAGES – Vindictive or exemplary damages
cannot be awarded under Contract Act. However, these may be awarded by
Court under tort under special circumstances e.g. * Dishonour of cheque by Bank
when there was balance in account, as it causes loss of reputation of credit
worthiness of person issuing cheque * Breach of contract to marry, as it hurts
both feelings and reputation.
Quantum Meruit – ‘Quantum meruit’ means ‘as much as earned’. A
contract may come to end by * breach of contract * contract becoming
void or * Voidable contract avoided by party. In such case, if a party has
executed part of contract, he is entitled to get a proportionate amount
i.e. ‘as much as earned by him’. This is not by way of ‘damages’ or
‘compensation for loss’. - - The principle is that even when contract
comes to a premature end, the party should get amount proportional to
the work done/services provided/goods supplied by one party. One
party should not get enriched at the cost of other.
Contract of indemnity - A contract by which one party promises to
save the other from loss caused to him by the conduct of the promisor
himself, or by the conduct of any other person, is called a ‘contract of
indemnity’. - - Illustration - A contracts to indemnify B against the
consequences of any proceedings which C may take against B in
respect of a certain sum of 200 rupees. This is a contract of indemnity.
[section 124].
Contract of guarantee - A “contract of guarantee” is a contract to
perform the promise, or discharge the liability, of a third person in case
of his default. The person who gives the guarantee is called the
“surety”; the person in respect of whose default the guarantee is given
is called the “principal debtor”, and the person to whom the guarantee
is given is called the “creditor”. A guarantee may be either oral or
written. [section 126]. - - [Person giving guarantee is also called as
‘guarantor’. However, Contract Act uses the word ‘surety’ which is
same as ‘guarantor’]. - - Three parties are involved in contract of
guarantee. Contract between any two of them is not a ‘contract of
guarantee’. It may be contract of indemnity. Primary liability is of the
principal debtor. Liability of surety is secondary and arises when
Principal Debtor fails to fulfill his commitments. However, this is so
when surety gives guarantee at the request of principal debtor. If the
surety gives guarantee on his own, then it will be contract of indemnity.
In such case, surety has all primary liabilities.
CONSIDERATION FOR GUARANTEE - Anything done, or any promise made, for the
benefit of the principal debtor, may be sufficient consideration to the surety for giving the
guarantee. - - Illustrations - (a) B requests A to sell and deliver to him goods on credit. A
agrees to do so, provided C will guarantee the payment of the price of the goods. C
promises to guarantee the payment in consideration of A’s promise to deliver the goods.
This is sufficient consideration for C’s promise. (b) A selms and delivers goods to B. C
afterwards requests A to gorbear to sue B for the debt for a year, and promises that if xe
does so,`C will pay for them in default of payment by B. A agrees to forbear as requested.
This is a sufficient consideration for C’s promise. (c) A sells and delivers goods to B. C
afterwards, without consideration, agrees to pay for them in default of B. The agreement
is void. [section 127].
Bailment - Bailment is another type of special contract. Since it is a ‘contract’, naturally
all basic requirements of contract are applicable. - - Bailment means act of delivering
goods for a specified purpose on trust. The goods are to be returned after the purpose is
over. In bailment, possession of goods is transferred, but property i.e. ownership is not
transferred. A “bailment” is the delivery of goods by one person to
another for some purpose, upon a contract that they shall, when the
purpose is accomplished, be returned or otherwise disposed of
according to the directions of the person delivering them. The person
delivering the goods is called the “bailor”. The person to whom they
are delivered is called the “bailee”. - - Explanation : If a person already
in possession of the goods of another, contracts to hold them as a
bailee, he thereby becomes the bailee, and owner becomes the bailor,
of such goods, although they may not have been delivered by way of
bailment. [section 148]. [Thus, initial possession of goods may be for
other purpose, and subsequently, it may be converted into a contract
of bailment, e.g. seller of goods will become bailee if goods continue in
his possession after sale is complete].
Bailment can be only of ‘goods’. As per section 2(7) of Sale of Goods
Act, ‘goods’ means every kind of movable property other than money
and actionable claim. - - Thus, keeping money in bank account is not
‘bailment’. Asking a person to look after your house or farm during
your absence is not ‘bailment’, as house or farm is not a movable
property.
Bailment of pledges - Pledge is special kind of bailment, where delivery of goods is for
purpose of security for payment of a debt or performance of a promise. Pledge is
bailment for security. Common example is keeping gold with bank/money lender to obtain
loan. Since pledge is bailment, all provisions applicable to bailment apply to pledge also.
In addition, some specific provisions apply to pledge. The bailment of goods as
security for payment of a debt or performance of a promise is called
“pledge”. The bailor is in this case called the “pawnor”. The bailee is
called the “pawnee”. [section 172].
Contract of Agency - Agency is a special type of contract. The concept of
agency was developed as one man cannot possibly do every transaction himself.
Hence, he should have opportunity or facility to transact business through others
like an agent. The principles of contract of agency are – (a) Excepting matters of
a personal nature, what a person can do himself, he can also do it through agent
(e.g. a person cannot marry through an agent, as it is a matter of personal
nature) (b) A person acting through an agent is acting himself, i.e. act of agent is
act of Principal. - - Since agency is a contract, all usual requirements of a valid
contract are applicable to agency contract also, except to the extent excluded in
the Act. One important distinction is that as per section 185, no consideration is
necessary to create an agency.
AGENT AND PRINCIPAL DEFINED - An “agent” is a person employed to
do any act for another or to represent another in dealings with third
persons. The person for whom such act is done, or who is so
represented, is called the “principal” [section 182].
WHO MAY EMPLOY AGENT - Any person who is of the age of majority
according to the law to which he is subject, and who is of sound mind,
may employ an agent. [section 183]. - - Thus, any person competent to
contract can appoint an agent.
WHO MAY BE AN AGENT - As between the principal and third persons
any person may become an agent, but no person who is not of the age
of majority and of sound mind can become an agent, so as to be
responsible to his principal according to the provisions in that behalf
herein contained. [section 184]. - - The significance is that a Principal
can appoint a minor or person of unsound mind as agent. In such case,
the Principal will be responsible to third parties. However, the agent,
who is a minor or of unsound mind, cannot be responsible to Principal.
Thus, Principal will be liable to third parties for acts done by Agent, but
agent will not be responsible to Principal for his (i.e. Agent’s) acts.
CONSIDERATION NOT NECESSARY - No consideration is necessary to
create an agency. [section 185]. Thus, payment of agency commission
is not essential to hold appointment of Agent as valid.
Authority of agent – An agent can act on behalf of Principal and can
bind the Principal.
AGENT’S DUTY TO PRINCIPAL - An agent has following duties towards principal. *
Conducting principal’s business as per his directions * Carry out work with normal skill
and diligence * Render proper accounts [section 213]. * Agent’s duty to
communicate with principal [section 214] * Not to deal on his own account, in
business of agency [section 215]. * Agent’s duty to pay sums received for
principal [section 218] * Agent’s duty on termination of agency by
principal’s death or insanity - [section 209].
REMUNERATION TO AGENT - Consideration is not necessary for creation of
agency. However, if there is an agreement, an agent is entitled to get
remuneration as per contract.
RIGHTS OF PRINCIPAL - * Recover damages from agent if he disregards directions of
Principal * Obtain accounts from Agent * Recover moneys collected by Agent on behalf
of Principal * Obtain details of secret profit made by agent and recover it from him *
Forfeit remuneration of Agent if he misconducts the business.
DUTIES OF PRINCIPAL - * Pay remuneration to agent as agreed * Indemnify agent for
lawful acts done by him as agent * Indemnify Agent for all acts done by him in good faith
* Indemnify agent if he suffers loss due to neglect or lack of skill of Principal.
TERMINATION OF AGENCY - An agency is terminated by the principal revoking
his authority; or by the agent renouncing the business of the agency; or by the
business of the agency being completed; or by either the principal or agent dying
or becoming of unsound mind; or by the principal being adjudicated an insolvent
under the provisions of any Act for the time being in force for the relief of
insolvent debtors. [section 201]. - - In following cases, an agency cannot be
revoked – * Agency coupled with interest (section 202) * Agent has already
exercised his authority (section 203) * Agent has incurred personal liability.